Investor Lawyers Blog

Securities Fraud News: Union Pension Funds Settle Class Action Case for $64M, Deadline for Implementing Volcker Rule is Extended, and Ex-Panther Energy Trader Goes to Prison For Spoofing

Published on: July 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

$64M Pension Fund Fraud Settlement Reached Against Dana Holding Corp. Executives
Plaintiffs in the shareholder class action case brought against Michael Burns and Robert Richter have reached a $64M out-of-court settlement with the two ex-Dana Holding Corp. executives. The union pension funds include lead plaintiffs SEIU Pension Plans Master Trust, Plumbers & Pipefitters National Pension Fund, and the West Virginia Laborers Pension Trust Fund.

They accused Bornes and Richter, the company’s ex-CEO and CFO, respectively, of purposely misleading investors about Dana Holding’s financial woes in the months prior to its filing for bankruptcy in 2006. Although the securities fraud case was initially dismissed by a district court on the grounds that the plaintiffs failed to show that the two men and Dana knew they were engaging in wrongdoing, the 6th U.S. Circuit Court of Appeals in Cincinnati reversed that decision, saying evidence showed otherwise.

Federal Reserve Gives Banks More Time to Meet Volcker Rule Requirements
The U.S. Federal Reserve has extended the deadline for banks to rid themselves of ownership in certain legacy investments and cut ties with funds that are barred under the Volcker Rule. The rule, part of the Dodd-Frank Act, aims to stop banks with government-backed deposits from betting on Wall Street for their benefit. It doesn’t allow insured banks and their subsidiaries to own or be affiliated in any way with a private equity fund or hedge fund or take part in proprietary trading. Lenders are not allowed to trade using their own capital and are restricted from investing in funds.

AOG Wealth Management President Ordered to Pay Couple $331K for Private Placement Investments

Published on: July 16, 2016 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority Arbitration Panel is ordering AOG Wealth Management chief executive and president, Frederick Baerenz, to pay Roger and Barbara Bond $331K in compensatory damages over private placement investments.

The panel found Baerenz liable for unsuitable trading because he allegedly misled the Bonds about the risks involved in the direct private placements they invested in from ’06 to ’09. At the time, Baerenz was affiliated with Pacific West Securities.

The Bonds invested about $941K in private placements. Their legal team contends that these were not suitable investments for them.

Private Placements

Private placements are offerings of a company’s securities that are not registered with the SEC. They are not offered to the general public.

Hedge Funds Continue to See Losses

Published on: July 15, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Bloomberg reports that in the 12 months ending in March 2016, funds of hedge funds lost over $100M due to poor performance and outflows. The figures come from eVestment, a research firm that examined data from over 2,500 funds.

According to eVestment’s report, over those four quarters hedge fund clients withdrew $50.3B, whiles managers reported $51.5B in investment losses. Assets in the hedge fund sector dwindled 11% to $841.6B. They have not been that low since June ’09.

Funds of funds invest in hedge fund portfolios. They used to be the largest single investor of these funds and at one point were accountable for nearly 50% of assets. Now they comprise just 28%, reports eVestment. Returns for funds of funds have not improved this year so to date.

Known investors that have begun to pull out significant money from hedge funds include the New York city pension plan, American International Group (AIG)MetLife (MET), and others. The New York Times reports that Larry Robbins of Glenview Capital Management and William Ackman of Pershing Square Capital Management, two of the most well-known hedge fund managers, have lost money consistently. Viking

SEC Fines RiverFront Investment Group For Charging Clients Extra Fees

Published on: July 15, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission says RiverFront Investment Group has agreed to pay a $300,000 to settle allegations that the firm charged clients additional investment management fees beyond the agreed upon wrap fees. RiverFront is settling the SEC charges without denying or admitting to them.

With wrap fee programs, clients pay a yearly fee that is supposed to cover a number of services, including the cost of trades made by a sponsoring brokerage firm. Any additional fees have to be fully disclosed.

According to the regulator, RiverFront used a designated broker-dealer from ’08 until late ’09, which is when it started to use other brokers. However, although RiverFront told investors that some “trading away” from the sponsoring broker was occurring, the firm did not accurately describe how often this was happening. The use of these other brokers cost clients additional fees.

RiverFront maintains that it had been looking for best execution prices when working with the other broker-dealers, and the SEC acknowledges that the firm did not make money by trading away when it used these brokerage firms. However, clients still paid millions of dollars in added charges. It wasn’t until late 2011 that RiverFront modified its Form ADV disclosure so that clients were notified about its use of non-designated brokers.

SEC News: Regulator Approves In-House Enforcement Reforms, Adopts Guidance For Security-Based Swap Transaction Reporting, and Will Audit Financial Advisers Over Mutual Fund Shares

Published on: July 14, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission to Audit RIAs Over Mutual Fund Share Classes
The SEC has announced that it will audit registered investment advisers so that it can examine the kinds of mutual fund share classes that they sell to clients. Share class recommendations and compliance are of particular interest to the regulator.

Because RIAs are fiduciaries, they have a duty to uphold their clients’ best interests. This includes selecting the lowest-cost share classes and 529 plan investments on a client’s behalf, depending on the latter’s investment goals. The Commission wants to see whether conflicts of interest exist, such as when an adviser is also the brokerage firm or is affiliated with a firm that garners fees from selling certain mutual fund share classes.

The SEC also wants to look at whether RIAs are disclosing if there is anyone getting paid compensation for the sale of either mutual fund share classes or other investment products. The fee might be a charge for the actual sale or a fee incurred according to the assets sold.

SEC Adopts Amendments to Regulation SBSR
The U.S. Securities and Exchange Commission has adopted guidance and amendments for Regulation SBSR, which includes rules for the public dissemination and regulatory reporting of security-based swap transactions. The rules and guidance were created to enhance transparency in the market for security-based swaps. They were mandated under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Bill to End Securities Law Exemptions in Puerto Rico Passes the U.S. House

Published on: July 14, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. House of Representatives has voted to pass legislation that would get rid of exemptions from federal securities law for registered securities offered in U.S. territories, including Puerto Rico. The bill is called the U.S. Territories Investor Protection Act of 2016. Rep. Nydia Velazques (D-NY), who sponsored the legislation, said that if passed into law it would give key protections to American citizens in the territories. The bill would also put an end to long standing exemptions that were granted to territorial securities under the Investment Company Act.

Rep. Velazquez believes that had there been such a law previously, certain investment losses that have been sustained in the U.S. territories could have been prevented. She recently noted that certain issuers of securities in Puerto Rico have allegedly become their own underwriters, allowing them to sell and package the securities without letting investors know of this conflict of interest.

Unfortunately, this exact situation is what played out in Puerto Rico over the last decade. Many residents in Puerto Rico have suffered because they were not told of conflicts of interest and about how risky the bond funds they bought were. Their losses have been further compounded by the U.S. territory’s debt crisis. Puerto Rico owes $70 billion to investors, many of whom purchased the bonds indirectly through bond funds.

With Velazquez’s bill, investment companies on the island and other U.S. territories would have to deal with the same rules as their counterparts on the mainland. The legislation includes a three-year grace period for companies to get into compliance with new rules. (It also grants the SEC the authority to extend that timeframe via rulemaking if necessary.)

Last month, U.S. President Barack Obama signed into law PROMESA, the Puerto Rico Oversight Management and Economic Stability Act, which will help the island restructure its debt. On July 1, Puerto Rico defaulted on $911 million of bond payments that were due to creditors that day. At least $799 million of that was general obligation debt, which was supposed to be constitutionally guaranteed. However, Puerto Rico Governor Alejandro Garcia Padilla issued a debt moratorium that made the default on these debt payments possible.

Ex-Prudential Financial and MetLife Broker is Barred over Deceptive MetLife Variable Anuuity Sales

Published on: July 13, 2016 | by Shepherd Smith Edwards & Kantas, LLP

FINRA has banned Winston Wade Turner from the securities industry. The former Prudential (PRU) and MetLife (MET) broker is accused of engaging in deceptive variable annuities sales. Turner was fired from Pruco Securities, a Prudential subsidiary, in 2015. The cause of his firing was deceptive sales practices.

Now, FINRA has barred him for a number of causes, including giving false information to clients about variable annuity sales, the fraudulent misrepresentation and omission of key facts to customers about the sales, providing false information in VA-related documents, and not giving testimony to the self-regulatory organization during its probe into this matter.

According to the SRO, Turner fraudulently misrepresented and omitted material facts about VA sales and concealed that he had persuaded a lot of customers to give up existing variable annuities or other investments so that they would buy the newer VAs that he was selling. He is accused of persuading at least 12 clients to trade their existing investments for this purpose, costing them over $150K in surrender charges.

SEC Bars Broker From Industry, Orders Her to Pay $4M for Inflating Firm’s Investment Performance to Bring In Rich Investor Clients

Published on: July 11, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has barred broker Dawn J. Bennett from the securities industry. The regulator also ordered and her firm to pay over $4M in fines and disgorgement. The ruling was issued by an SEC administrative law judge.

According to the Commission, Bennett exaggerated her firm’s investment performance and assets under management so she could garner business from rich clients. Bennett is accused of promoting inflated assets to try to get high rankings on Barron’s top advisers list and using these rankings to retain new clients. She was named to that list three times as a manager who oversaw over $1B in client assets.

Bennett and her firm, Bennett Group Financial Services, purportedly claimed to be managing between $1.1B and $2B from at least ’09 through ’11 when, in reality, the firm never had more than $407M under management during that time period. The SEC, along with arbitration claims filed with FINRA, contend that at least two of her firm’s clients lost over $1M when they invested their funds with her.

Four Former Barclays Traders Get Prison Terms for Libor Rigging

Published on: July 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

Four ex-Barclays (BCS) bankers who were convicted for conspiring to manipulate global benchmark interest rates have been sentenced to time behind bars for their crimes. The defendants and their prison terms are: Jay Merchant, for six-and-a-half years; Jonathan Mathew for four years; Peter Johnson for four years, and Alex Pabon for two years and nine months.

While Merchant, Mathew, and Pabon were convicted of their crimes, Johnson, a former senior dollar Libor submitter and the ex-head of dollar cash trading, pleaded guilty in the case against him in 2014. They all were charged with conspiracy to defraud involving Libor rigging to benefit their banks and one another as they defrauded others.

The judge who presided over the former Barclays traders’ case accused them of abusing their position, committing the offenses more than once over a significant period of time, and compromising the banking industry. All of the men will serve half their prison terms before being released on license.

The manipulation of Libor, the London interbank offered rate, and other benchmark interest rates led to a global probe that has resulted in hefty fines for the firms whose brokers colluded together to rig rates. In 2012, Barclays admitted that it let its derivatives traders rig Libor rates. The bank paid $450M to authorities in the US and Europe to settle charges. Collectively, the banks accused in the Libor manipulation scandal have paid billions of dollars in penalties. There have been at least 13 convictions.

Elder Financial Fraud News: Indiana, Vermont, and Alabama Add New Laws to Protect Older Investors, US House Votes Approval of Senior Safe Act, & Garden State Securities to Pay Damages to Older Clients

Published on: July 9, 2016 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. House of Representatives has voted to approve a bill that will hopefully encourage financial advisers to help stop senior financial fraud. The Senior Safe Act protects financial advisers and their firms from liability for violating privacy laws when they report suspicions or evidence of elder financial abuse.

The bi-partisan legislation, unanimously approved by house members, seeks to help financial institutions and their employees identify when a person may be the victim of exploitation. It also gives them the ability to report their suspicions without fear of liability. However, specialized training to help advisors identify and report such incidents would be required in order for immunity from liability to go into effect.

Also this month, laws were put in place in Indiana, Alabama, and Vermont mandating that financial advisers notify state authorities when they suspect that an elderly person or another vulnerable adult may be the victim of financial abuse. The new legislation lets advisers put a freeze on fund disbursements from a client’s accounts. It also gives them immunity from liability for reporting their suspicions.

Meantime, the Securities and Exchange Commission and the Financial Industry Regulatory Authority remain committed to their battle against elder abuse. FINRA has proposed a rule that, while it doesn’t mandate reporting of senior abuse, allows advisers to name a third party that could be notified if they suspect that a client is the victim of elder financial abuse. Also, in January, the North American Securities Administrators Association unveiled its NASAA Model Act to Protect Vulnerable Adults from Financial Exploitation.